The Ultimate Playbook for Reducing The Fed’s Balance Sheet | Professor Darrell Duffie on 4 Tools For Federal Reserve To Shrink Reserve Demand In Banking System
About this episode
Professor Darrell Duffie discusses tools for the Federal Reserve to reduce reserve demand and shrink its balance sheet.
Learn more about the Fundrise Income Fund here: https://Fundrise.com/mm It's no secret that the new Fed chair, Kevin Warsh, prefers the Federal Reserve to have a smaller balance sheet, perhaps a much, much smaller balance sheet. The consequences of this range from the mundane to the profound, but what is without question is that in order to reduce the Fed's balance sheet, there need to be additional tools to reduce reserve demand from the banking system. Stanford Professor Darrell Duffie returns to Monetary Matters to explain that to safely reduce Fed assets, policymakers must first address the liability side of the ledger by drastically lowering commercial banks' high demand for reserve balances. If the Fed simply sells off assets without adjusting this structural demand, it risks losing control of interest rates and sparking extreme volatility in repo funding markets, similar to the disruptions witnessed in September 2019. To prevent such a liquidity crisis, Duffie outlines four crucial policy tools from his latest research: utilizing temporary open market operations, easing stringent liquidity regulations, implementing software-driven liquidity savings mechanisms, and tiering…
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